Retail Return Fraud Rises as Key Holiday Deadline Approaches

Deadlines are looming for consumers who want to return unwanted holiday gifts.

Many retailers extend return deadlines for purchases made in November and December until the end of January. But in many other parts of the return process, companies have become less forgiving.

As more consumers shop online and return more orders, retailers have cracked down on fraud. It has become their main concern in the return process, industry experts said.

“Fraud is number one, and it's not even close to number two,” said Vijay Ramachandran, vice president of marketing enablement and experience at shipping and mailing company Pitney Bowes.

Retailers expect 16.5%, or $24.5 billion, of holiday returns to be fraudulent this year, according to a survey by Appriss Retail and the National Retail Federation. That's higher than an average of 13.7% estimated for all of 2023.

Processing a return online is already an expensive proposition: it averages 21% of an order's value, according to a Pitney Bowes survey of 168 retailers. Half of the companies surveyed paid more than 21%.

The cost of processing a return is rising not only because of higher shipping and processing costs, but also because of increased fraud, industry experts said.

“In cases where fraud is on the rise, like this year, as we've seen in the data, retailers are forced, at a minimum, to change their policies slightly to accommodate that potential fraud and abuse,” according to Michael Osborne. CEO of Appriss Retail, which helps companies manage theft and fraud. “This increases their costs and essentially erodes their margin.”

Saks CEO Marc Metrick said at the NRF Big Show in mid-January that while the retailer has long received legitimate customer complaints about missing items, fraudulent “merchandise not received” complaints to the company have more than doubled in recent years.

That's just a fraudulent return tactic.

Returning an empty box or an item other than the one received, such as a box of bricks instead of a TV, is the most common form of return fraud, according to Pitney Bowes' Ramachandran. In other cases, scammers might return stolen goods. In another example, they could also Look in the trash to find a receipt, then go to that store, find that product, and take it to the return counter.

“There are examples of price arbitrage where someone buys a product on sale or promotion and then returns it for full price to recoup the delta of that profit, basically stealing those extra dollars,” said Appriss Retail's Osborne. .

“Credit laundering too, where they take things like gift cards or store credit and use it to purchase a product, then return it and put that money on a different card, allowing them to take the money from a potentially stolen card.” or gift card or credit obtained fraudulently,” he added.

Appriss Retail gave CNBC an example of a person who made more than $224,000 by fraudulently returning more than 1,000 items to 215 stores in multiple states, using a variety of return tactics.

There is also less egregious behavior, often considered return abuse rather than fraud. Includes “putting on braces” or “wardrobes.”

“Bracketing” is when a buyer purchases more than one size or color with the intention of returning the one that doesn't work. While it is not fraud, it still incurs a return expense for the retailer. “Cloakrooming,” when shoppers buy an item, wear it, and then return it, is seen as a major problem.

More than half, or 56%, of consumers confess to “keeping clothes,” according to a survey by fraud prevention firm Forter. One in four consumers said they purchased an item during the 2023 holiday season with the intention of returning it after use.

Forter chief risk officer Doriel Abrahams said premeditated and intentional returns after use are especially problematic.

Just under half, or 47%, of those planned to “dress up” during the holiday season. They were between 18 and 34 years old, according to Forter. “Wardrobe” occurs with many products, not just clothing.

“I've heard of people every time they move apartments, they buy tools, drills, whatever, put up the shelves and things they need, and then they just send them back,” Abrahams said.

Bad actors committing return fraud are hurting honest shoppers as retailers tighten their policies to prevent abuse, those tracking the tactics said.

“It's really putting a damper on your own experience, because right now I see it as the plexiglass in the pharmacy. We're having to do a version of that on our website, we're adding friction to the customer experience. We're having to match the good actors.” “said Metrick of Saks. “That's a problem for us and we're going to have to solve it.”

Return fraud has caused several retailers to tighten their policies for all consumers. Some even use artificial intelligence and other technologies to customize their return policies, which can vary for each individual.

“Certain retailers offer the ability to have different return windows based on your known history with that retailer, essentially equivalent to the status level of a loyalty program,” Osborne said. He said some companies like Amazon have adopted that strategy and “that's where other retailers need to go.”

Amazon did not directly say whether it is seeing more return fraud. Company spokesperson Kristina Pressentin said, “Amazon continues to make progress in identifying and stopping fraud before it happens” and that it “uses advanced machine learning models to proactively detect and prevent fraud, in addition to employing specialists dedicated to detecting, investigating and detaining. fraud.”

Companies have tried to keep consumers happy in an increasingly competitive retail environment by offering lenient return policies. Nearly three-quarters, or 73%, of shoppers choose a retailer based on the returns experience and 58% want a seamless, no-questions-asked returns experience across all channels, according to a survey by Appriss Retail and Incisiv .

But companies have to try to strike a delicate balance between appeasing those customers and trying to reduce return costs and incidences of fraud and abuse.

“It's no coincidence that one bright day eight months ago, almost every company started charging for shipping returns, or started having more restrictive returns. [policies]” said Forter's Abrahams. “Money talks. At the end of the day, if you see that you are starting to pay too much for restocking, for validating returned items, or for return shipping costs, then you will have to maintain those costs. to your clients.”

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